When the Mortgage Forgiveness Debt Relief Act was introduced in 2007, sellers felt like they had plenty of time to short sale their home without penalty. Now that we’re approaching the December 31,2012 deadline, however, plenty of homeowners and real estate professionals are wondering whether the Act will be extended, or if sellers should really be preparing themselves for the consequences of short selling their homes.

So what exactly does this mean for homeowners? Essentially, the IRS would be requiring any borrower to be liable for the amount of money they escaped from paying, depending on the circumstances of the sale. If you borrowed $300,000 on a home that you lived in for over ten years and paid it down to $225,000, then you essentially still owe the bank $225,000 no matter the value of the home. With the real estate bubble bursting, we know plenty of homes values plummeted, leaving the homeowners responsible to pay on a home worth less than they could sell it for. Let’s then say that this homeowner had a job offer across the country and had to sell their home for the newly valued price of $190,000. Once they pay their closing costs, they land at $180,000 but the payoff amount is still $225,000. Instead of coming back to the homeowners for the $45,000 they owe the bank, they report that amount of canceled debt as an income to you. You would then have to claim that $45,000 as income, which you would have pay taxes on.

The Mortgage Forgiveness Debt Relief Act has been relieving homeowners of this responsibility for the past five years, which has helped countless families who considered their home their primary investment. So the major question now is whether the Act will be extended past the end of the year, and if so, for how long? Many homeowners have had a terrible time selling, and if you know anything about Berkeley real estate, you understand that the short sale process can take from six months to over two years to complete, depending on how cooperative your lender is. With the Act expiring this year, it would be no surprise if lenders were dragging their feet on getting these homes sold. So will Congress extend the Act to help Americans who’ve been crushed by the real estate market? Analysts are thinking the probably lands at about 60-40 for an extension, but with the looming “fiscal cliff” there will be much more difficulty in justifying tax cuts.

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